Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

Thursday, June 13, 2013

James Harrison Spends A Fortune To Play In The NFL

In the 2002
NFL draft, he was considered too short (6’ - 0”) to play linebacker and too
light (240 lbs) to play defensive line. The Pittsburgh Steelers put him on
their practice squad. He was released three times before finally finding a home
with Pittsburgh in 2004. In the 2009 Super Bowl, he intercepted Kurt Warner, returning
the ball for a 100-yard touchdown. It stood for a while as the longest play in Super Bowl history.

His on-field
behavior has not harmonized with the NFL’s recent penchant for mitigating on-field
collisions. He is a ferocious player, drawing fines for a helmet-to-helmet hit
on a quarterback (Colt McCoy) and knocking-out two wide receivers on the same
team (Mohammed Massaquoi and Josh Cribbs of Cleveland).His estimated NFL fines for 2010 alone are
estimated at $120,000.

He has now
come to Cincinnati and will play with the Bengals. His name is James Harrison,
and he is our strong-side linebacker on Sundays.

He has also
been in the news recently talking about his training and conditioning regimen:

My body is what helps me to make money. Whatever there is
that I need to do to try and make myself better or get myself healthy, I’m
going to do it. It wouldn’t be unreasonable to say that I spend anywhere
between $400,000-$600,000 on body work, as far as taking care of my body,
year-in and year-out.

As far as training, I have a hyperbaric chamber. I rent a
hyperbaric chamber when I’m in Arizona. I have massages and I bring people in
from New York, Arizona to where I’m at…I have a homeopathic doctor and I do a
lot of homeopathic things. It’s just a lot, supplements, so on and so forth.”

Can you imagine?
This man spends the equivalent of an upper-income bracket on being able to go
on game day. It would go along way to easing the pain if some (or all) of the
cost could be tax –deductible.

Let’s walk
through it.

Is any of this deductible as medical
expense?

The tax rule here is that the expense be for the “diagnosis, cure,
mitigation, treatment, or prevention of disease, or for the purpose of
affecting any structure or function of the body.” How do we apply this to an
NFL linebacker, whose job is to participate in the equivalent of 50 to 60 car
crashes a game, 16 games per year?

There is little question that some expenses will qualify. For example, a
massage prescribed by a doctor pursuant to a treatment regimen will qualify as
a medical expense. It is the nature of the treatment, not its practitioner,
that determines deductibility.

Another requirement is that the treatment would not have been incurred for nonmedical reasons.

The last part gives us pause: can one persuasively argue that a
hyperbaric chamber or acupuncture were not incurred for nonmedical reasons?
Playing football is not an AMA-recognized medical disorder. We may lose many of Harrison’s expenses through
this net.

Is any of this deductible as an
employee business deduction?

An important point to remember is that Harrison is an
employee of the Bengals, the same way I am an employee of my firm. There is a
requirement that employee business expenses be “ordinary and necessary.” I
cannot deduct my gym fees, for example, but can he?

Harrison is in the trade or business of playing football.
“Ordinary and necessary” should be defined in relation to his playing football.
He has a much closer nexus to gyms and dieticians than I do, for example. I
would be hard-pressed to argue that a trainer is “ordinary and necessary” to my
trade or business of being a tax CPA. Put me on a pro sports team, however, and
one has a completely different argument.

Think about it this way: Harrison signed a $4.4 million
dollar deal with the Bengals. NFL contracts are different from NBA and MLB
contracts, as those are guaranteed. Only $1.2 million of Harrison’s contract is
guaranteed. The balance is contingent on his making the team and reaching certain
performance incentives.Stating this
another way, $ 3.2 million of his contract is not guaranteed, which is a lot of
motivation to spend $400,000 to $600,000 to stay in shape. Would you spend it?
I would, without hesitation.

This not to say that the IRS may not challenge him.

Do you know Lamar Odom? He is an NBA player for the Los
Angeles Clippers,although many may know him as husband to Khloe
Kardashian. The IRS disallowed $172,000 in fitness fees and $12,000 in NBA
fines on his 2007 tax return. Odom was then living on a modest $9.3 million
salary, so he did what any other financially-pressed American would do – he
contested the IRS adjustment.

He argued the
following:

(1)As an NBA player he is obligated to
stay fit, healthy and in NBA-level condition. This is not the same as you or me
playing weekend pick- up ball. Odom was expected to perform as a professional
basketball player throughout the basketball season.

(2)IRC Section 162(f) disallows deductions
for fines and penalties. Odom’s fines were not of the type described in that
Code section, because his fines were league-imposed and not government-imposed.
NBA Commissioner David Stern may think
of himself as the law, but his authority is not same as a policeman writing a speeding
ticket. Odom further argued that league fines are becoming common for professional
athletes. Because of this, they have become “ordinary and necessary” expenses.

The case
was settled before being decided, and the IRS was prohibited from talking about
the matter. There was no written opinion or ruling. We nonetheless learned that
the IRS threw in the towel on the fitness fees and fines and contented
themselves by assessing some small tax on game tickets that Odom had distributed.

In 1965
Sugar Ray Robinson found himself in a fight with the IRS. There were several items
on the docket, three of which attract our interest as we discuss professional athlete
expenses. The IRS tried to disallow a deduction for fight tickets which Leonard
had given away. The Tax Court disagreed, finding that some number of the
tickets could be reasonably connected with Sugar Ray’s trade or business as a
professional boxer. The IRS tried to disallow deductions for Ray’s manager, as
well as training facilities preparatory to a fight. Once again, the Court
decided that the expenses were reasonably connected. The Court would allow the
deductions as long as other requirements – such as substantiation – were met.

The Court
decided that Leonard had substantiated the expenses for the training facilities
and allowed the deduction. Sugar Ray could not substantiate his manager expenses,
so the Court disallowed that deduction.

NOTE: I
admit that I am curious how Sugar Ray could not document the amount he paid his
manager. I suspect there was another entire sub-story buried in there.

The Court’s
reasoning in the Sugar Ray case is still tax law, and hopefully Harrison’s tax
advisor has apprised him of it. Harrison needs to be meticulous in documenting
his expenses. He does not need to give the IRS an easy way to disallow his business
deductions simply because he cannot produce the paperwork.

There is
another tax technique that comes to mind: incorporating “James Harrison Inc” as
a brand. Don’t laugh. The PGA golfers do it. The idea here is to place
off-field income, such as endorsements, within the corporation. The corporation
now has an income stream, and with it the corporation will issue a W-2 to
Harrison. It will also adopt a medical reimbursement plan. To the extent that Harrison
incurs medical expenses, he will submit his expenses to the corporation for
reimbursement. The corporation will get a deduction and Harrison will get
reimbursed. This sidesteps the nasty 7.5%-of-AGI limitation on the individual income
tax return. By the way, that limitation goes to 10% next year, as part of the
ObamaCare tax increases. Good thing Congress stepped-in there to close that abusive
tax shelter of deducting doctor and medical bills.

What are
the odds that Harrison will generate enough endorsement income to fund this
technique? Do you remember his famous quote about Roger Goodell, the NFL
Commissioner who kept fining him for excessive on-field hits?

If that man
was on fire and I had to pxxx to put him out, I wouldn’t do it.”

I’m not
sure what quotes like that do to Harrison’s endorsement value. Among some of my
friends, I suspect they would increase it.

About Me

Thirty years years in tax practice. It's a long time, and I have seen virtually everything short of the fabled tax-exempt unicorn. I was raised in Tampa, went to school in Missouri, taught at Eastern Kentucky University, lived in Georgia, got pulled to Cincinnati when I married, have in-laws in England and a daughter going to the University of Tennessee. I am not sure where I will wind up next, but I hope there is better weather.